"Price Gouging" Sends Important Signals About Risk

With Hurricane Florence making landfall in the Eastern United States, the usual reports of the “evils” of the private sector price gouging the poor, desperate people in the disaster zone tend to crop up. The economic arguments as to why this claimed problem really isn’t a problem have been covered extensively. However, government laws on price gouging, and the public sector presence in disaster management in general, have additional effects beyond creating shortages of gasoline for first responders to engage in critical rescue operations.

At its core, economics is really the study of human behavior, particularly focused on the motivations behind the production and distribution of resources. Humans, by and large, attempt to rationally maximize their limited resource utilization toward their best uses. These economic motivations, however, can incentivize deadly results, particularly if the costs of multiple competing options are distorted by government intervention.

In terms of Hurricane Florence, there is a rather curious refusal to evacuate from the disaster zone with some people even openly electing to travel to the Carolinas to take advantage of uncrowded beaches. It’s not like the area has little warning, like in the days when people had to hope cloud watching provided sufficient evidence of an approach — we had a pretty good idea of where Florence was going to hit five days ago. If Houston can complete a city-wide evacuation in 24 hours under chaotic conditions due to the Mayor trying to convince people to stay until the last minute, five days is sufficient to move a similar population spread over a larger area like the coastline of the Carolinas. So, it’s not that evacuation is infeasible or even all that difficult over a nearly week-long period.

The Relative Cost of Evacuation

What is happening is that people are looking at the costs of evacuation and the costs of sheltering in-place to make the decision. Certainly, while five days is sufficient time to board up the house and drive inland to a motel somewhere, the costs of the trip, food and lodging can be pricey. The problem with this, however, is the costs are warped by the price gouging laws and expectation of speedy, and no-cost to the individual, rescue by government agencies. If fuel is legislatively held at, for the purposes of this example, $3 per gallon, that generator that burns 18 gallons a day would cost $756 to run if the power was out for 14 days. They could also buy up water at $4 for 45-17oz bottles. This certainly seems less expensive than driving inland and renting out a room at $180/night for 14 nights; unless one is able to get one of the rooms major hotel chains like to offer at a discount to evacuees to enhance the hotel firm's image. (It's also true that private charities frequently cover the expenses of those who are less able to afford it.) Consideration of the probable costs of relocation likely led to many people making active plans to stay in place by stocking up on fuel and water. It is these individuals that elect to not leave in the face of a dangerous storm that can result in fatalities that have reached upward of 1,833 in the more modern era. And this often also leads to massive rescue efforts — on the taxpayer dime — for those who survive.

The psychological effect is called “Risk Compensation.” When people believe they have some factor providing additional safety, such as some plywood on the windows and a few cases of Hormel Chili in the cupboard, they end up compensating for these safety effects by taking even bigger risks, like not leaving when a Category 2 storm hits an area without much in the way of slowing down the large storm surge that will come with it. Except that plywood and cases of chili won’t stop a wall of water coming at the house.

Imagine for a moment if the expectation of riding out the effects of a two-day storm wasn’t $765 in fuel — plus two weeks’ worth of groceries — priced as if this were any other day? If the fuel station was to “gouge” customers in the day or two before landfall and charge, for the purpose of this exercise, $30 per gallon instead of the usual $3, the cost of keeping your freezer powered with your portable generator just spiked to $7,650. And that two-weeks' worth of groceries is no longer your usual $400 bill for a family of four but $10,000. In that case, people would think twice about deciding it’s a good idea to take a #hurrication and sit in their living room while the area floods. It’s not like the ultra rich are bidding up the cost — they have enough wealth to not concern themselves with taking an unscheduled vacation to the Hamptons while waiting for the storm to pass and are unlikely to stick around when the weather goes bad. The rich don’t overwhelm the poor for scarce resource competition in disaster areas because there aren’t any rich people around in disaster areas.

If faced with the real costs of preparing for a known incoming disaster, far more people will decide it’s just not worth hunkering down and riding out the storm surge, wind, flooding and dangerous aftermath of wading through what you probably flushed down the toilet the day before. Price gouging laws fool people into thinking it is affordable to bunker in their homes during such events, which greatly increases the mass of people that find themselves in need of rescue, if they survive, making it significantly more difficult on emergency responders. If the costs of remaining were prohibitive, only those who find themselves physically unable to leave would need rescuer consideration, drastically reducing the hours and personnel required for such efforts plus in addition to not depriving the rescuers from a more readily available local supply of goods required to support the effort.

The Cost of Rescue Efforts

This is on top of the fact that people generally believe that rescue, if they do get in trouble, is going to be “free.” Of course, it’s not since the general public has to pick up the tab. A relatively simple search for a hiker that went off a trail can cost $1,500 for a single evening of effort, assuming the lost hiker isn’t injured and can walk out on their own. Factor in things like helicopter evacuation, like this hiker in Colorado that generated a $41,000 bill for one afternoon, and the cost of sitting around at home can be tremendous.

All told, what should probably run someone refusing to evacuate a storm in excess of $100,000 in food, fuel and rescue efforts is subsidized by law and government rescue agencies to be around $900. While $900 is unquestionably more affordable, affordability (definitely to the chagrin of various socialists) is a dirty word when talking about weathering a natural disaster. The last thing we want to do is make sitting through a hurricane affordable to the person deciding to wait it out; we want it God-awful expensive to convince him to leave and the free market pretty much does that all on its own via the supply and demand mechanic. A hurricane is going to be expensive one way or the other, it’s best to not tack on additional expense under the guise of helping.

Promoting a false sense of affordability through price gouging laws has very real human life consequences. It’s better for a person to look at that absurd fuel price and decide it’s better to get out of town than to stock up and try and stay. They’re more likely to live if they leave. And this is exactly what we’d like people to do, not create subsidies that make people think it’s a grand idea to brave days wading through sewage water or sitting on their roof waiting for an inflatable raft to show up.

Justin Murray received his MBA in 2014 from the University of St. Gallen in Switzerland.

If the media cared much about the plight of small business owners, we'd see many more stories about how government regulations, taxes, and mandates make life more difficult for both owners and their employees.